While a few bitcoin-linked securities, like bitcoin futures contracts, have been approved by the regulators and are actively trading in U.S. and global markets, the market participation in such derivatives-based securities has mostly remained confined to the active traders and institutional participants with deep pockets. Cryptocurrency proponents have been advocating the launch of a bitcoin exchange-traded fund (ETF) for a long time.
Once approved, it is expected to facilitate a low-cost and convenient route for the retail investors to gain bitcoin exposure through exchange-traded products. Several applications to the Securities and Exchange Commission (SEC) for bitcoin ETFs have been unsuccessful, leaving no domestic option for bitcoin ETF for U.S.-based investors. However, a foreign-listed instrument recently paved the way for allowing U.S. investors to take a secure route to trading and investing in bitcoin. (See also: SEC Again Rejects a Slew of Bitcoin ETFs.)
The Bitcoin Tracker One, an exchange-traded note (ETN) that has been available for trading on the Nasdaq Stockholm exchange since 2015, recently started quoting in U.S. dollars. Earlier, this tracker instrument was available only in euros or Swedish krona, and the U.S. dollar edition will allow U.S. participants to trade.
How Bitcoin Tracker One Works
Launched in 2015 on the NASDAQ/OMX exchange in Stockholm, the Bitcoin Tracker One became the first listed bitcoin-based security on a regulated exchange. The NASDAQ/OMX exchange classifies it as non-equity linked “tracker certificate,” which is a security that attempts to track the performance of its underlying asset and trades as any other standard share listed on the exchange.
Bitcoin Tracker One provides exposure to the performance of bitcoin by tracking the performance of the price of bitcoin (BTC/USD) before a fee. The objective of the product is to provide a daily return approximately equivalent to the performance of bitcoin across the three most liquid digital exchanges as selected by the product provider, before fees and costs. In simple terms, if the price of bitcoin moves up or down 1%, the price of the Bitcoin Tracker One ETN is also expected to move by same amount.
Image Courtesy: XBTProvider
The ETN has secured approval from the Swedish FSA (Finansinspektionen) and it maintains the necessary bitcoin reserves in custody with certificates guaranteed by Global Advisors (Jersey) Limited. It does not distribute any dividends.
How to Trade Bitcoin Tracker One
Any investor can purchase ETN shares through brokerage accounts using the ticker symbol CXBTF, reports Bloomberg. When an investor purchases shares of Bitcoin Tracker One, they pay money to get an equivalent stake in bitcoins less any fees and charges. For instance, bitcoin was trading at $18,980.4 on Dec. 18, 2017. The same day, the shares of Bitcoin Tracker One ETN were available for $94.31. Anyone purchasing the minimum required one share of this ETN would pay the above cost to the issuer, who would purchase the equivalent number or fraction of bitcoins for the net money received from such investors. Essentially, this ETN allows investors to make low-cost, low-amount investments in bitcoin. When the investor wants to cash out their bitcoin ETN holdings, they simply sell their shares and get the dollar equivalent. The ETN issuer sells the equivalent number or fraction of bitcoins for the redemption.
Advantages of a Bitcoin ETN
The Bitcoin Tracker One investors don’t need to worry about the safe storage of bitcoins—that is taken care of by the custodians and guarantors who certify the actual bitcoin reserves. by contrast, if individuals directly hold bitcoins in digital wallets, they are responsible for the security of the digital assets and remain vulnerable to the rising number of thefts and hacks. (See also: Hackers Have Stolen $1.1B in Crypto This Year.)
The comparatively low amount per share makes the bitcoin investment more affordable for smaller, retail clients. Additionally, the holding resides as a standard share in the demat account, taking away the hassles of maintaining and securing a separate digital wallet. As of writing, the ETN charges a total annual cost of 2.5% of the invested amount, which can be less than the transaction costs incurred while directly dealing in bitcoins.
Risks Associated With a Bitcoin ETN
The investment does come with forex risk. Though one can buy Bitcoin Tracker One ETN shares in U.S. dollars and get their orders executed in dollars, they are still settled and cleared in local currency and held in custody in Sweden. Any fluctuations in dollar-krona rate may impact the net returns.
Investors should also note that this is a net asset value (NAV)-based product that gets priced as a end-of-the-day product. Though comparable and being pitched as an apt substitute of a bitcoin-based ETF, the Bitcoin Tracker One ETN is technically not an ETF. ETFs generally trade in real time with price changes every second, allowing intraday trading opportunities for active traders, as well as short selling options. Unfortunately, these active trading features cannot be exploited using Bitcoin Tracker One. (See also: 5 Ways to Short Bitcoin.)
The product also comes with other standard risks, like credit risk linked to financial position of the issuer and the counterparty risk, which represents chances of default by the issuer. Though the reserve provision ensures safety of the investments, it remains limited to the custodian and guarantor being able to repay what is owed.
Additionally, while such investment products offer ease of convenience to the general public, one must not forget that the valuation of these products are directly tied to the underlying asset: bitcoin. If the price of bitcoin goes down significantly, the price of Bitcoin Tracker One shares will also tank. This ETN is comparable to Grayscale’s Bitcoin Investment Trust. (See also: Grayscale Launches Four New Cryptocurrency Funds.)
The Bottom Line
While U.S. bitcoin enthusiasts will still need to wait longer for a true bitcoin ETF, the ETN route offers them an alternative, albeit one with additional risks, costs and overhead.